Power Steering Chrysler into Bankruptcy

For those who think that president Obama is not playing politics and power-steering billions to his political allies with the Chrysler bankruptcy, think again.


Chrysler filed for bankruptcy on April 30, 2009 after receiving more than $8 billion in taxpayer subsidies after it was decided that declaring bankruptcy in Autumn 2008 was “out of the question”, said Democrat House speaker Nancy Pelosi. And as 789 dealerships – about 25% of the total – are closed, congressional hearings are being held to determine exactly why they are being shuttered.


A dealership does not cost Chrysler much money at all in comparison to their role in making the company work by selling its product. Dealers are independent franchises that buy cars from Chrysler and sell them. It would seem to be in Chrysler’s interest to keep dealers open, particularly since those still operating must be profitable.


These closings appear to be Obama’s way of undermining the small-scale capitalist entrepreneurs of America. Dealerships are owned by businesspeople. The average auto dealership employs 50 people and pays $2.5 million in salaries while generating tax revenues for local governments. Closure is going to harm towns and cities across the nation.


One group of dealerships being spared closing is owned by a former Clinton administration official.  But liberal commentators are challenging conservative allegations that there is bias against Republican-owned dealerships in the closings. That challenge is really a feint.

The central issue is that dealerships are owned by businesspeople – even many Democrats. In the big picture, however, if dealerships were owned by the unions or by the faculty at Harvard, they would never be treated this way and the Obama administration would be helping them to stay open. So there is clearly bias.


Many are calling the dealer closings unconstitutional in contravention of the so-called ‘takings clause’ in the Fifth Amendment which states that “nor shall private property be taken for public use without just compensation.”


 “We feel there has been a denial of constitutional due-process rights,” said Leonard Bellavia, a lawyer for dealers facing closure. He added that he believes that Chrysler executives do not support the dealer closing plan but that it is being dictated by the Obama administration.


Chrysler, with 3,200 dealerships, has more than double the number of dealers of Toyota, Nissan and Honda, which each have about 1,200 retail outlets, while General Motors has about 6,000. But Bellavia said it should be up to owners to decide when to exit the business if there is not enough demand. In fact market conditions already have put hundreds of unprofitable dealerships out of business.


A spokeswoman for Chrysler said, however, that the decision about cutting dealers took into consideration location, customer satisfaction, and sales potential, not politics.


Auto production factories, on the other hand, cost Chrysler huge amounts of money to operate and union jobs are being lost in closing factories. Eight Chrysler plants, including five with a total of 4,800 employees, will close in 2010. Yet when it comes to bankruptcy, Obama has arranged for the unions to be paid off first with 55% of the company, since unions were big Obama supporters. Meanwhile bondholders are being paid last, 29 cents on the dollar. Usually in a bankruptcy the bondholders (secured creditors) are first in line for payment.


Obama’s anti-capitalism came out when he discussed Chrysler shareholders:  “While many stakeholders made sacrifices and worked constructively, I have to tell you that some did not. I don’t stand with them (financial firms and hedge funds that had demanded a better deal in restructuring).  I stand with Chrysler’s employees, families, and communities. I don’t stand with those who held out while everyone else was making sacrifices.”


Yet those investors are the people who financed the company’s operation. They certainly deserve better treatment than Obama is giving them. Meanwhile union wages are as high as $75 an hour wage/benefit/pension and so union workers have been prospering for decades without taking any risk, as investors have. Now Obama is rewarding those with no risk (unions) and punishing those with risk capital in the game (debtholders).


The bankruptcy was put on hold temporarily when three Indiana state pension funds challenged the last-place status of bondholders (themselves) in the creditor line at Chrysler. The three funds, representing police, teachers and taxpayers, stand to lose at least $6 million if the deal proceeds as presently structured. They argue that Obama overreached by using federal bailout money, and that the bankruptcy court unfairly put the claims of the United Autoworkers Union ahead of the pension funds.


Interestingly, this action pits one largely liberal group – state workers in Indiana – against two other liberal groups – unions and the Obama administration. This Chrysler deal is the first time in the history of more than 150 years of American bankruptcy law when secured creditors (bondholders) received less than unsecured creditors (the unions).


Obama forced Chrysler’s hand when it could not come to an agreement with its creditors for a restructuring plan. Bankruptcy judge Arthur Gonzalez approved a government plan and sale of Chrysler’s assets which allows most of the assets to be purchased by a new entity in which Italian carmaker Fiat would own 20%.


On January 20, 2009, Fiat and Chrysler LLC announced that they had a non-binding agreement to form a global alliance. Under the terms of the agreement, Fiat could take up to a 35% stake in Chrysler and gain access to its North American dealer network in exchange for providing Chrysler with the technology to build fuel-efficient vehicles in the US along with access to Fiat’s global distribution network.


The Fiat deal was finalized June 10.


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